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Letter to a Newborn Son, Part III, by Victor Niederhoffer

The Economical Aspects of the Law of Diminishing Returns

There is a law that you'll discover called the law of diminishing returns that you're going to have to balance with the noble activities in your life The law is that with a fixed amount of a certain input, as you keep adding other inputs to achieve some ends the returns keep getting smaller The example that's usually used to show it is that if you have a certain amount of land and then you keep adding additional units of machinery or chemicals to produce something like wheat, the additional units of wheat keep getting lower and lower. But this universal law applies to all things that have input.

In your schoolwork, your first efforts at studying or doing homework are going to yield a lot more than your last efforts. The reason for this law is that we all have an unlimited number of things that give us happiness. Because we have unlimited desires and we're only human with a limited amount of resources, be they time, money or mental or physical strength, we have to sacrifice something to achieve any satisfaction.

The things we sacrifice at first to achieve our desires are the ones that are least costly, where the path requires the least effort or the least money. As we go down the road, the path is always a little bit more torturous, and the costs increase.

Because of this law, you're going to have to economize in what you try to accomplish. After something like 10% of your efforts in a particular field, you're going to achieve, say, 90% of the output that's possible. The consequence and the other side of the coin of this law is that the satisfaction you achieve by using your money or time are going to be greatest at the early stages of your spending of time, effort and money than they will be in the later stages.

They call this law the law of diminishing marginal utility, and the first law the law of diminishing marginal return. Both laws are a consequence of the universal law of the path of least resistance.

You will find consequences of these laws in almost everything you do. The number of toys you play with, the number of books you read, the number of girls you share romance with, the number of jobs tat you try, the number of sports you master, the number of jobs you take, the friends you associate with, the employes that give you the most value, the customers who give you the most profits, the times that you make the most money in the market.

Like all good things, there has to be a balance. You see, in order to really achieve greatness in anything, you're going to have to give it that little bit of extra. It's just because of the law of diminishing marginal returns that most people stop at the point where their additional inputs become costly to them. So if you want to achieve greatness, you're going to have to overcome the economical laws of diminishing returns and put in that extra effort -- stuff that's really hard and costly -- so you can differentiate yourself from the herd.




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